AAA Shortage Drives International Holdings of Treasuries

Bloomberg reported that foreigners increased their holdings of U.S. government debt by $1.84 trillion to a record $5 trillion since the Fed began the first round of Treasury purchases in May 2009, taking their stake to 60.5% of the securities not held by the central bank, government data show. The Fed added $1.18 trillion during that period, to $1.65 trillion, or 16.8% of the total, from 7.6%.

Bloomberg said international buying underpins the government’s financing of a budget deficit forecast to exceed $1 trillion for a fourth year. Ten-year note yields stuck below the rate of inflation have caused some investors to shun the debt. At the same time, the risk of declines has been limited by the shrinking supply of AAA rated alternatives.

Bloomberg quoted a government bond strategist as saying, “There are buyers that lurk everywhere.” But the source added, “There’s plenty of cash out there that would love to get its hands on quality assets at a reasonable rate. The problem is, there’s not enough high-quality liquid bonds.”